EC1101E Semester I, 2014/15

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Problem Set 1
(Tutorial 1 / Week 3)


Section A
Read the following article, As Plants Close, Teenagers Focus More on College:
http://www.nytimes.com/2009/06/26/business/26grads.html
Use the concept of opportunity cost to explain how the recession has affected college enrollment
decisions.


Section B
1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods
and services or the flow of factors of production for each of the following activities.
(a) Barry spends $200 on a Tigerair flight to Bangkok.
(b) Joe earns $500 a month from his 20 percent ownership of Appleseed.
(c) John earns $30 an hour tutoring a secondary school student.
(d) Sarah pays $1,500 on a dress from Gucci.


2. The country of Midian produces two goods, iPods and hamburgers.
(a) Assuming increasing opportunity costs, draw the production possibilities frontier for this
economy. Explain how it exhibits increasing costs.
(b) Pick an efficient point that would be chosen if the Midianites prefer iPods to hamburgers, and
label it A. Explain why you picked this point.
(c) Pick an efficient point that would be chosen if the Midianites prefer hamburgers to iPods, and
label it B. Explain why you picked this point.
(d) At which point (A or B) is the opportunity cost of an iPod higher? Explain.
(e) Suppose that the economy experiences a recession and resources lie idle. Indicate one possible
point where the country of Midian could be producing, and label it C. Explain why you picked
this point.
(f) Suppose that the recession ends and there is a technological breakthrough in the production of
iPods, i.e., fewer inputs are needed to produce an iPod. Indicate the effect on the production
possibilities frontier.


3. The following table describes the production possibilities of two cities in the country of Baseballia.
Boston Chicago
Pairs of red socks
per worker per hour
3 1
Pairs of white socks
per worker per hour
3 2
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(a) Without trade, what is the price of red socks (in terms of white socks) in Boston? What is the
price in Chicago?
(b) Which city has an absolute advantage in the production of each color sock? Which city has a
comparative advantage in the production of each color sock?
(c) If the cities trade with each other, which color sock will each export?
(d) What is the range of prices at which trade can occur?


4. The following table shows the hypothetical labor requirements per ton of wool and per hand-knotted
rug, for New Zealand and for India.
New Zealand India
Per ton of wool 10 hours 40 hours
Per hand-knotted rug 60 hours 80 hours
(a) Which country has an absolute advantage in each product?
(b) Calculate the opportunity cost in each country for each of the two products. Which country has
a comparative advantage in each product?
(c) If India produces one more rug and exports it to New Zealand, what is the lowest price
(measured in tons of wool) that it would accept? What is the highest price that New Zealand
would pay?


5. Using the data from question 3, suppose that New Zealand has 300 million hours of labor per period,
while India has 800 million hours.
(a) Draw PPFs for both countries for the two goods (put quantity of wool on the vertical axis).
(b) Suppose that, before trade, each country uses half of its labor to produce wool and half to
produce rugs. Locate each countrys production point on its PPF (label it A for New Zealand,
and A for India).
(c) After trade opens up and country completely specializes in its comparative advantage good,
locate each countrys production point on its PPF (label it B for New Zealand, and B for India).


6. This problem uses the data from question 3, and the graphs you drew in question 4. Suppose that the
terms of trade end up at 4 tons of wool for 1 hand-knotted rug. Suppose, too, that New Zealand
decides to export 12 million tons of wool to India.
(a) How many rugs will New Zealand import from India?
(b) How much of each good will New Zealand and India consume after trade?
(c) On the PPFs you drew for problem 10, plot each countrys consumption point after trade. Label
it C for New Zealand, and C for India.





EC1101E Semester I, 2014/15
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Section C
Chapter 2
1. Which of the following would be strictly a microeconomic topic?
A. A general rise in interest rates.
B. A drop in inflation.
C. An increase in total production in Singapore.
D. A drop in the nations unemployment rate.
E. An increase in the price of a Mercedes-Benz.

2. Which of the following would be studied in macroeconomics?
A. A drop in the price of personal computers.
B. An individual households decision on how to allocate its spending.
C. A rise in employment in movie theatres across the nation.
D. Total output in the nation.
E. A local banks increase in the interest rate offered on savings deposits.

3. When economists disagree about whether legislation is a good idea, even when they agree about its
impacts, the disagreements are usually over
A. normative issues.
B. positive issues.
C. the mathematical calculations in an economic model.
D. whether microeconomics or macroeconomics is more important.
E. whether economic theory is useful in explaining the behavior of actors in the economy.

4. When all resources used in production are not perfectly substitutable,
A. specialization does not lead to greater production.
B. there will be constant opportunity costs.
C. the production possibilities frontier will be concave (bowed outward).
D. the economy or firm is producing at a point outside of its production possibilities frontier.
E. the economy or firm will only produce one good in equilibrium.

5. One explanation for the drop in the standard of living in the Soviet Union during World War II is that
A. the war led to a movement along its production possibilities frontier away from civilian goods
and towards military goods.
B. the war led to an outward shift in the production possibilities frontier due to a rise in the level of
technology.
C. prior to the war, there was much productive inefficiency in the Soviet Union.
D. the opportunity cost of producing military goods was zero in their economic system.
E. resources used to produce civilian goods were equally capable of producing military goods.


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6. Assume that Toms various possible activities are mutually exclusive. The opportunity cost from
choosing one activity equals the
A. summed value of all his alternative activities.
B. summed value of all his alternative activities minus the value of the chosen activity.
C. summed value of all his alternative activities minus the value of the next most valuable
alternative activity.
D. value of the next most valuable alternative activity.
E. value of the next most valuable alternative activity minus the value of the chosen activity.

7. Jerry is considering attending a concert with a ticket price of $35. The cost of driving to the concert
and parking there will be another $20. In order to attend the concert, he will have to take time off
from his part-time job or forgo studying for an exam scheduled for the next morning. He estimates
that he will lose 5 hours at work at a wage of $6 per hour, or 5 hours of study time. If he considers
studying the best alternative use of his time, his opportunity cost of attending the concert is
A. $55.
B. $55 plus the value of the higher exam grade he could earn by studying 5 hours.
C. $85 plus the value of the higher exam grade he could earn by studying 5 hours.
D. $55 minus the value of the higher exam grade he could earn by studying 5 hours.
E. $85 minus the value of the higher exam grade he could earn by studying 5 hours.

Chapter 3
8. Suppose that the U.S. has an absolute advantage over Mexico in producing both agricultural and
manufactured goods. In the U.S., the opportunity cost of 1 unit of agricultural output is 2 units of
manufactured goods. In Mexico, the opportunity cost of 1 unit of agricultural output is 1.5 units of
manufactured goods. Total production in the U.S. and Mexico will be maximized if
A. the U.S. specializes in both types of output.
B. Mexico specializes in both types of output.
C. the U.S. specializes in manufactured goods and Mexico specializes in agricultural goods.
D. the U.S. specializes in agricultural goods and Mexico specializes in manufactured goods.
E. each country achieves self-sufficiency.

9. Consider the following table on the number of labor hours required to produce a pound of cheese and
a bottle of wine:
France Italy
Per pound of cheese 10 hours 20 hours
Per bottle of wine 30 hours 40 hours
Which of the following statements is correct?
A. Italy has an absolute advantage in producing wine.
B. Italy has a comparative advantage in producing cheese.
C. Italys opportunity cost of a pound of cheese is 2 bottles of wine.
D. Frances opportunity cost of a bottle of wine is 3 pounds of cheese.
E. France produces more wine than Italy does.
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10. Mutually beneficial trade between two countries is possible only as long as
A. unit costs of production are the same no matter how many units are being produced.
B. marginal costs rise as production increases.
C. marginal costs are equal to average total costs.
D. one country has an absolute advantage in the production of one good, while the other country
enjoys a similar advantage in making another good.
E. one country has a comparative advantage in the production of one good, while the other country
enjoys a comparative advantage in making another good.

11. Suppose a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats a year, and a
worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats a year. There are 20
workers in each country. Which of the following statements is true?
A. Both countries could gain from trade with each other.
B. Neither country could gain from trade with each other because Cornland has an absolute
advantage in both goods.
C. Neither country could gain from trade with each other because neither has a comparative
advantage.
D. Oatland could gain from trade between the two countries, but Cornland would definitely lose.
E. Cornland could gain from trade between the two countries, but Oatland would definitely lose.

12. Suppose a worker in Boatland can produce either 5 bushels of wheat or 25 tons of fish a year, and a
worker in Farmland can produce either 25 bushels of wheat or 5 tons of fish a year. There are 30
workers in each country. No trade occurs between the two countries. Boatland produces and
consumes 75 bushels of wheat and 375 tons of fish a year, while Farmland produces and consumes
375 bushels of wheat and 75 tons of fish a year. If trade were to occur, Boatland would trade 90 tons
of fish to Farmland in exchange for 80 bushels of wheat. If Boatland now completely specializes in
fish production, how many tons of fish could Boatland now consume along with the 80 bushels of
imported wheat?
A. 490 tons of fish.
B. 500 tons of fish.
C. 610 tons of fish.
D. 660 tons of fish.
E. 670 tons of fish.